New Lender Rates

Freddie
Investor Operations
3:42 pm in London, UK


Hi, could someone please confirm or deny the rumour that market rate can be affected (downwards) by a large number of investors opting in for the lower priority rate as opposed to the market rate? Can you also confirm or deny whether recent rate drop was due to larger number of investors choosing the priority rate? Thanks!
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Both of those are correct
Market Rate is the average rate at which loans have been matched in the last 30 days

Therefore if lenders select Priority Rate, that will slightly bring the average rate down, and therefore bring Market Rate down. If this continues to happen, then Market Rate can fall enough to be visible to the 1 decimal place it is shown to (e.g. 6.5% -> 6.4%)
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So potentially, this may drop to RS levels of 3% and there is no mechanism to actually lift it up, just keep bringing it down?
But rate at which loans are given to customers have not changed, or have they? By choosing priority rate we are in effect subsidising their borrowing costs?
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You are correct in your interpretation of how Market Rate is determined. We have deliberately limited the options available to lenders (by only allowing orders at Market Rate and Priority Rate) to reduce the volatility of the rate lenders can achieve, and the potential speed at which Market Rate could decline. If we were to open up a full limit order functionality, where lenders could lend at any rate they wished (e.g. 4% or 8%), this Market Rate would likely fall significantly faster.

The decrease in rate is passed on the borrowers. If a borrower happens to be matched at Priority Rate, then they pay 0.1% less interest for than if they are matched at Market Rate
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Thanks Freddie, so there is no way back to 6.5% then?
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The way back up to 6.5% would be if we opened up the market place to allow lenders to place orders at any rate they wished
We cannot tell what would happen in that case, but it is likely Market Rate would fall further

The rate is determined by supply and demand. If there are a huge number of lenders waiting to get their money matched, then many of them choose to lend at Priority Rate, and the rate decreases.
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Did you consider 3rd tier - slower investment with +0.1% option?
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As I mentioned above, we have limited the options available, to increase predictability for our lenders and reduce the active management of the investment.
Yes we have considered that option, and there is a good chance we will release that as an intermediate step.
I can tell you now though, that if you lent at 6.5% today, (i.e. Market Rate + 0.1%) you would likely have to wait several days to get matched

The gain in interest earned would likely be wiped out by the cash drag you'd experience
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Thanks! While this is all above 6%, probably there will not be much panic, but once it dips below, it may not be that great. Probably keeping it fixed for everyone would even play out better in the end and would stop rate drop....
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Yes, that's correct. Of course the idea is that if the rate were to fall, then the supply might decrease (because fewer lenders were willing to lend at a lower rate), and then the rate would go back up again. That is assuming there is an option to invest at a higher rate than Market Rate, but that's likely to be possible in the future
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Thanks, this was very informative
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No problem. Let me know if you have any further questions
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Are you OK for me to post this whole conversation on the P2P forum? people are just guessing how this currently works and it would clear things out for them
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Yes, sure.
We do keep track of the comments on P2P Forum, and I was intending on replying in order to clear up some of the uncertainty .
The difficulty is that we are an Appointed Representative of Resolution Compliance Limited, who are authorised and regulated by the FCA.
Every piece of content, including responses to threads on P2P Forum, that we release into the public eye, needs to be submitted as a financial promotion, and checked that it is fair and not misleading.
This process can take some days for Resolution Compliance to give us the go ahead, which often means that the response is no longer relevant to the discussions taking place.
As you have found, we are highly responsive on our website live chat, but when submitting posts on other websites, it can take some time, which is why we do not (cannot) respond to the queries rapidly.
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That is another fact of the day, thanks for clearing this out as well